BATTING 1000 IN EARNINGS SEASON
Earnings season has been busy, especially for me because I just moved from New York back to Colorado since we last corresponded. The long drive was interrupted by a tire blowout, at which time I discovered that neither the tire company nor the car dealership felt like jumping through any hoops to honor that pesky little warranty. Nevertheless, the tire needed to be changed, and then replaced. Now imagine having your car’s trunk packed to the hilt with your possessions, and having to unload all of them on the side of a highway in order to reach the spare tire! Fortunately, no great harm was done to the car, my possessions or my wallet, and I continued driving toward the Rocky Mountains.
We’ve been fairly lucky this earnings season in that every single one of our portfolio companies that reported earnings managed to meet or beat the market’s expectations. Of course, that doesn’t mean share prices will rise. Oh heavens no! Short-term movements in stock prices can easily resemble a roulette game. Nevertheless, we buy high quality companies and we give their stocks a chance to enhance our net worth.
If you have questions about stocks that I didn’t cover today, please send an email to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletins from October 22, 23 and 24 in which I mentioned news, rating changes and/or price action on Adobe Systems (ADBE), Alexion Pharmaceuticals (ALXN), Blackstone Group (BX), Bristol-Myers (BMY), Carlyle Group (CG), CIT Group (CIT), Commercial Metals (CMC), Dow Inc. (DOW) and Southwest Airlines (LUV).
QUARTERLY EARNINGS RELEASE CALENDAR
October 28 am: Mercury General Group (MCY) – 3Q
October 30 am: Baker Hughes Company (BKR), Royal Caribbean Cruises (RCL) and Total SA (TOT) – 3Q
October 30 pm: CF Industries (CF) – 3Q
October 31 am: Bristol-Myers (BMY), Corteva (CTVA) and Marathon Petroleum (MPC) – 3Q
November 4 pm: Mosaic (MOS) – 3Q
November 5 pm: DaVita (DVA) and Voya Financial (VOYA) – 3Q
November 7 pm: Universal Electronics (UEIC) – 3Q
EARNINGS SEASON SCORECARD:
Big earnings beat: Alexion Pharmaceuticals (ALXN), Blackstone Group Inc. (BX), CIT Group (CIT), Commercial Metals Company (CMC), Dow Inc. (DOW), Southwest Airlines (LUV) and Synchrony Financial (SYF)
Earnings within 5% of consensus estimate: Alaska Air Group* (ALK), Citigroup* (C) and Schlumberger* (SLB)
*at or above consensus
TODAY’S PORTFOLIO CHANGES
Commercial Metals (CMC) moves from Buy to Hold.
Corteva (CTVA) moves from Hold to Buy.
Synchrony Financial (SYF) moves from Buy to Hold.
Voya Financial (VOYA) moves from Buy to Hold.
LAST WEEK’S PORTFOLIO CHANGES
Adobe Systems (ADBE) moved from Buy to Hold.
Alaska Air Group (ALK) moved from Strong Buy to Hold.
Alexion Pharmaceuticals (ALXN) moved from Buy to Strong Buy.
Blackstone Group (BX) moved from Buy to Strong Buy.
Baker Hughes Company (BKR) moved from Strong Buy to Buy.
Carlyle Group (CG) moved from Buy to Hold to Retired.
Citigroup (C) moved from Strong Buy to Hold.
Southwest Airlines (LUV) moved from Buy to Strong Buy.
BEST STOCKS TO BUY TODAY
*Please note that a trading range is not a price target. It’s simply the recent range of the stock’s price action. Sometimes I will specifically say that I plan to sell a stock at the top of its trading range. In most other cases, I expect the stock to eventually surpass the current trading range and begin a new run-up.
**A good choice today for investors looking for growth (G), growth & income (DIV) or trading (T).
UPDATES ON GROWTH PORTFOLIO STOCKS
CF Industries (CF – yield 2.6%) is a global leader in transforming natural gas into nitrogen, making products that fertilize crops and products that remove harmful emissions from industrial activities, with outstanding operational capabilities and a cost-advantaged production and distribution platform. Products include ammonia, granular urea, UAN, ammonium nitrate and diesel exhaust fluid. The company operates nine facilities in Canada, the U.K. and the U.S. Analysts expect CF Industries to report third-quarter EPS of $0.36, within a range of $0.14-$0.57, on the afternoon of October 30.
CF is an undervalued, mid-cap aggressive growth stock. After declining earlier in the year, full-year earnings estimates have been rising since mid-June. Analysts now expect EPS to increase 96% and 22% in 2019 and 2020. The 2020 P/E is 15.6. The stock has traded between 46-52 since mid-June. Continue to accumulate CF within that range. Strong Buy.
DaVita Inc. (DVA) is the largest provider of kidney care services and home dialysis in the U.S., treating patients with chronic kidney failure and end stage renal disease. DaVita’s services have significantly lowered the gross mortality rate among their patients, and also lowered their need for hospitalizations. DVA is an undervalued, mid-cap growth stock. DaVita is expected to report third-quarter EPS of $1.23, within a range of $1.12-$1.38, on the afternoon of November 5. Analysts expect full-year EPS growth of 32.5% and 12.1% in 2019 and 2020. The 2020 price/earnings ratio is 11.0. DVA rose above price resistance to 63 in September, then pulled back to 56. DVA could reach the upper 60s during its next run-up. Buy DVA now. Strong Buy.
Marathon Petroleum (MPC – yield 3.1%) is a leading integrated downstream energy company and the nation’s largest energy refiner, with 16 refineries, majority interest in a midstream company, 10,000 miles of oil pipelines and product sales in 11,700 retail stores. Marathon has prepared its refining system for upcoming IMO 2020 regulations, and is confident in their ability to produce large amounts of ultra-low-sulfur diesel fuel to meet the new demand. Marathon Petroleum was featured in the October issue of Cabot Undervalued Stocks Advisor.
Last week, it was reported that Marathon is considering the sale of two refineries that are located in Utah and Alaska. This potential action is likely a result of pressure from activist investors who seek to split the company into three entities: Speedway, refining operations and midstream holdings. These investors issued an open letter to Marathon shareholders last week, calling for the resignation of CEO Gary Heminger.
MPC is an undervalued large-cap stock. The company is expected to report third-quarter EPS of $1.38, within a range of $1.20-$2.16, on the morning of October 31. Expect volatility. Full-year EPS are expected to fall 34% 2019, then rise 80% in 2020. The 2020 P/E is low at 9.3. Morgan Stanley raised their price target on MPC from 70 to 80. MPC is up $25 from its August low, and still rising. There’s some price resistance near 70, then again at 78 and 83. Buy on dips. Strong Buy.
Southwest Airlines (LUV – yield 1.2%) is the largest U.S. domestic air carrier, transporting over 130 million customers annually to 101 locations in the U.S. and 10 additional countries. The Boeing 737 MAX is currently removed from Southwest’s flight schedule through February 8. LUV is an undervalued growth stock. Wall Street expects 2.1% EPS growth in 2019, followed by 16.2% EPS growth in 2020. The 2020 P/E is 11.3. LUV is actively rising. The stock could reach 62 this year, where it last traded in September 2018. Strong Buy.
Voya Financial (VOYA – yield 1.1%) is a U.S. retirement, investment and insurance company serving 13.8 million individuals and institutional customers. Voya has $560 billion in total assets under management and administration. Analysts expect EPS to grow 36% and 12.6% in 2019 and 2020. The 2020 P/E is 9.0. Voya is expected to report third quarter EPS of $1.40, within a range of $1.37-$1.45, on the afternoon of November 5. The stock is rising, and could surpass its July all-time high at 57 this year. EPS growth and valuation are solid. I’m moving VOYA from Buy to a Hold recommendation, pending revisions of analysts’ 2020 EPS estimates after third quarter results are reported. I prefer that the EPS growth rate bump up a bit in order for VOYA to remain in the Growth Portfolio. Hold.
UPDATES ON GROWTH & INCOME PORTFOLIO STOCKS
Blackstone Group Inc. (BX – yield 3.6%*) is the world’s largest and most diversified alternative asset manager with $545.5 billion in client assets. The company deploys capital into private equity, lower-rated credit instruments, public debt and equity, real assets, secondary funds and real estate. The ex-dividend date will be November 1. Watch for the November 7 semi-annual announcement of new additions to the MSCI Index. If BX is added to the index, that will create buying demand among some institutional portfolios. Consensus earnings estimates point to 33.5% EPS growth in 2020, and the 2020 P/E is 17.5. Last week, three investment firms raised their price targets on BX to 56-57. BX just retraced its September high near 54. Buy BX on pullbacks. Strong Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.92 and yielding 3.6%.
Citigroup (C – yield 2.7%) is a global financial company that serves consumers, businesses, governments and institutions in 98 countries; and the third-largest U.S. bank by assets. Earnings estimates rose again last week. Wall Street now expects EPS to grow 16.7% and 9.8% in 2019 and 2020. The 2020 P/E is 8.7. The stock is approaching its January 2018 peak near 77, at which time I will likely retire C from the portfolio in favor of a dividend stock with a stronger projected 2020 EPS growth rate. Hold.
Commercial Metals Company (CMC – yield 2.5%) is the largest rebar producer in the U.S. with a broad basket of merchant and wire rod offerings. Operations are located from coast to coast in the U.S. and in Poland. CMC is a small-cap stock with a market capitalization of $2.2 billion. Now that analysts are fine-tuning their 2020 earnings estimates for Commercial Metals, the numbers are disappointing, with low-single-digit earnings growth projected for fiscal 2020 (August year end). I’m moving CMC from Buy to a Hold recommendation, with the intention of unwinding the position. The price chart remains bullish, with resistance at 20-21, so I’m giving the stock a little more rope. Hold.
Corteva Inc. (CTVA – yield 2.0%), a.k.a. Corteva Agriscience, provides farmers with seeds and crop protection products (herbicides, fungicides and insecticides), enabling them to maximize yield and profitability. During the first half of 2019, Corteva spun off from DowDuPont (relatively debt-free), initiated a dividend, established a $1 billion share repurchase plan, introduced at least half a dozen new products, and delivered $50 million in cost synergies in excess of the planned $150 million. Additional goals include cumulative cost synergies from recent M&A activity totaling $1 billion, above-market revenue growth (4%-6% annually in 2020-2022), 12%-16% three-year annual EBITDA growth, and rising free cash flow and margins.
CTVA is a mid-cap growth & income stock. Corteva is expected to report a third-quarter loss of ($0.46) per share, within a range of ($0.64)-($0.34), on the morning of October 31. Analysts expect full-year EPS of $1.17 and $1.55 in 2019 and 2020, reflecting 32% 2020 growth. The 2020 P/E is 17.2. On October 1, I lowered my recommendation on CTVA to Hold when the price chart turned bearish. (There was no coinciding deterioration in Wall Street’s earnings expectations for the stock.) Now that the share price has stabilized, I’m moving CTVA from Hold to a Buy recommendation. Since earnings will be reported this week, expect immediate share price movement, most likely within a range of 25.5-28.5. Buy.
Dow Inc. (DOW – yield 5.4%) is the materials science division of the former DowDuPont (DWDP). As I reported last week, Dow delivered decent third quarter results, despite a rise in inventories of chemicals used in making plastics and weak demand. Now that Dow is exhibiting concrete progress on cash flow, cost cutting, debt repayment, a litigation win and an ability to thrive during a weak global economy, more Wall Street analysts are embracing the stock. Citigroup, Jefferies and RBC raised their price targets on DOW last week. Dow was featured in the October issue of Cabot Undervalued Stocks Advisor.
DOW is an undervalued growth & income stock. The company is expected to achieve EPS of $3.51 and $4.35 in 2019 and 2020. The projected 2020 EPS growth rate is 23.9% and the corresponding P/E is 11.6. The stock is approaching short-term resistance at 52; with additional resistance at 58. Strong Buy.
Royal Caribbean Cruises (RCL – yield 2.8%) is a cruise vacation company that delivers travelers to desirable and exotic destinations on all seven continents. The company operates a total of 63 ships, with 13 on order, under the brand names Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises and Silversea Cruises, and partnerships with German and Spanish cruise companies. Royal Caribbean is expected to report third-quarter EPS of $4.33, within a range of $4.23-$4.40, on the morning of October 30. RCL is an undervalued, large-cap growth & income stock. Wall Street expects EPS to grow 8.8% and 11.4% in 2019 and 2020. The 2020 P/E is 10.5. The price chart is improving. A good earnings report could push RCL into the 120s. Buy RCL now. Buy.
Total S.A. (TOT – yield 5.7%) is a French multinational integrated energy company that produces and markets fuels, natural gas and low-carbon electricity, operating in over 130 countries. Total is the second-largest private global liquified natural gas (LNG) player, with a worldwide market share of 10%. Total is expected to report third-quarter results on the morning of October 30. TOT is an undervalued, large-cap growth & income stock with a large dividend yield. The market expects Total’s EPS to fall 16.0% in 2019, then to rise 26.2% in 2020. The 2020 P/E is 9.9. TOT is rising toward short-term resistance at 53. The stock could trade anywhere between 50-57 in the coming months. Buy TOT for long-term capital gains, while locking in a large and rising dividend yield. Strong Buy.
UPDATES ON BUY LOW OPPORTUNITIES PORTFOLIO STOCKS
Abercrombie & Fitch (ANF – yield 4.6%) is a specialty retailer of Abercrombie & Fitch (a.k.a. A&F), abercrombie kids, and Hollister brand apparel and accessories for men, women and kids. The company operates over 850 stores globally. The company remains on track toward its multi-year goals of improving revenue, profits, expense-control, data analytics, online sales and global store expansion. There hasn’t been any significant news since I featured ANF in the October issue of Cabot Undervalued Stocks Advisor, and no changes in full-year earnings estimates.
ANF is an undervalued small/micro-cap stock. Wall Street projects EPS to fall 34% in 2019, then rise 70% in 2020. The 2020 P/E is 12.0. The drop in 2019 profit largely reflects the expense incurred by a decision to close several flagship stores that were not built by the current management team, who are successfully focused on lease negotiations, small-store formats, revenue and gross margin.
The ANF trading range is roughly 15-19. The stock is acting well. Even though I had not expected ANF to surpass 19 until the new year commences, I’m beginning to think that investors might be surprised by a new run-up in November. Buy.
Alaska Air Group (ALK – yield 2.0%) is a low-cost passenger airline. Alaska Airlines and its regional partners fly 46 million guests per year to more than 115 destinations with an average of 1,300 daily flights across the United States and to Mexico, Canada and Costa Rica. Alaska Air does not operate any Boeing 737 Max jets. Alaska Air Group reported third-quarter diluted EPS of $2.63 vs. the consensus $2.52, near the top of the wide estimate range. The company expects 2020 capacity growth of 3-4%. In addition to share repurchases and a pension plan contribution, Alaska Air Group reduced their debt-to-capitalization ratio to 42% as of Sept. 30, 2019 compared to 47% as of Dec. 31, 2018. Refer to the press release to learn of operational highlights and recent industry awards. Cowen & Co. and Raymond James promptly raised their target prices to 77 and 80, respectively.
ALK is a mid-cap stock with an $8.8 billion market cap. Full-year earnings estimates continue rising. Alaska Air is now expected to achieve EPS growth rates of 40% and 11% in 2019 and 2020. The 2020 P/E is 10.0. The stock will probably bounce around in the upper 60s, on its way to price resistance at 72-73. Hold.
Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. Current marketable drugs include Soliris, Ultomiris, Strensiq and Kanuma. The company is focused on the development of pipeline products that will fuel continued long-term profit and revenue growth. ALXN is an undervalued growth stock. Earnings estimates have been revised to their highest levels to date. Full-year EPS are now expected to grow 30.9% and 8.0% in 2019 and 2020. The 2020 P/E is 9.5, which is extremely low for a biopharmaceutical stock. Three investment firms raised their price targets for ALXN to a range of 146-170. The stock is cheap, profits are growing very well, and the stock appears capable of rising to the low 120s this year. Buy ALXN now. Strong Buy.
Baker Hughes Company (BKR – yield 3.3%) offers products, services and digital solutions to the international oil and gas community. On October 18, the company updated its corporate name and stock symbol to reflect the fact that General Electric no longer owns 50%+ of the common stock. The company is expected to report third-quarter EPS of $0.24, within a range of $0.21-$0.31, on the morning of October 30. BKR is an undervalued, mid-cap aggressive growth stock. The stock has traded between 21-25 for six months, and while there’s room for traders to make money, there’s no sign of a pending near-term move past 25. Buy.
Designer Brands Inc. (DBI – yield 5.7%) is one of North America’s largest designers, producers and retailers of footwear and accessories. The company operates DSW Warehouse, The Shoe Company and Shoe Warehouse stores with nearly 1,000 locations in 44 U.S. states and Canada; and Camuto Group. DBI is an undervalued, small-cap growth stock. The company has delivered 27 consecutive years of revenue growth. Analysts expect EPS growth rates of 14.5% and 14.7% in 2019 and 2020 (January year end); and company management is projecting 2021 EPS growth of about 24%. The 2020 P/E is very low at 8.0. DBI has traded between 16-17.5 since early September, and now appears ready to climb toward price resistance at 19. Buy DBI now for outsized total return potential in 2019 and beyond. Strong Buy.
Mercury General Group (MCY) – Third quarter results were reported yesterday. Watch for a separate Special Bulletin on that topic. (I didn’t have time to review all the data prior to publication of this week’s update.)
The Mosaic Company (MOS – yield 1.0%) is the world’s largest producer of finished phosphate and potash, supplying crop nutrients and animal feed ingredients via production facilities in the U.S., Canada, South America and the Asia-Pacific region. Their mission is to help the world grow the food it needs. Mosaic is expected to report third-quarter EPS of $0.24, within a range of $0.12-$0.33, on the afternoon of November 4. Full-year profits are expected to fall in 2019 and then to surge dramatically in 2020. The stock will likely trade between 20-25 in the near future. Buy.
Synchrony Financial (SYF – yield 2.4%) is a consumer finance company with 75.5 million active customer accounts. Synchrony partners with retailers to offer private label credit cards, and also offers consumer banking services and loans. SYF is an undervalued, mid-cap growth & income stock. Wall Street expects EPS to grow 13.6% and 7.5% in 2019 and 2020. The 2020 P/E is 7.8. I’m moving SYF from Buy to a Hold recommendation as it’s nearing short-term price resistance at 36.5. I plan to Retire SYF from the Buy Low Opportunities Portfolio when it approaches long-term resistance at 38.5. Hold.
Universal Electronics (UEIC) is a manufacturer and world leader of wireless and voice remote control products, software and audio-video accessories for the smart home; with over 400 patents and a strong pipeline of new products in the areas of safety and security, climate control and lighting. The company is expected to report third-quarter results on the afternoon of November 7. Analysts expect full-year EPS to increase 37% and 9.2% in 2019 and 2020. (It’s common, with microcap stocks, that analysts have only a vague idea of what to project for next year’s revenue and income.) The 2020 P/E is 14.5. UEIC is an undervalued growth stock with very little analyst coverage, appropriate for risk-tolerant investors and traders. The stock has traded between 47-53 since mid-September, and the price chart looks relatively bullish, although volume has been low. Buy.
UPDATES ON SPECIAL SITUATION STOCKS
Bristol-Myers Squibb Company (BMY – yield 2.9%) markets a long list of pharmaceuticals, including Coumadin and Eliquis, to treat cardiovascular, oncology and immune disorders. The company is expected to complete the acquisition of Celgene Corporation (CELG) by year end. Celgene markets therapies for cancer and immunological diseases, including Revlimid. Bristol-Myers is expected to report third-quarter EPS of $1.07, within a range of $1.03-$1.14, on the morning of October 31. Analysts expect full-year EPS to grow 7.5% and 42.8% in 2019 and 2020. The 2020 P/E is just 9.0. BMY is trading near 56 – a long-term resistance level. If the stock jumps after the earnings release, I would expect it to pull back to the mid-50s thereafter. Watch for opportunities to buy on pullbacks. Buy.
VanEck Vectors Oil Refiners ETF (CRAK) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS Global Oil Refiners Index (MVCRAKTR). The International Maritime Organization is mandating the use of either scrubbers or low-sulfur diesel fuels for the world’s 39,000 ships and tankers, beginning in January 2020. The purpose of the mandate is to minimize sulfur oxide (SOx) emissions into the atmosphere, and the mandate is nicknamed IMO 2020. Oil refining companies are expected to profit from the demand for low-sulfur diesel fuel. Read more here: IMO 2020: The Big Shipping Shake-Up. CRAK pays an annual dividend in late December, usually yielding 1-2%. Oil refining stocks have performed well in October, pushing CRAK up nicely. I expect continued strength from this exchange-traded fund. Buy CRAK on any size pullbacks. Strong Buy.
